It would be foolish to bank on a successful merger

Uniting two companies rarely works, and the problem is magnified for banks

The Allied in Allied Irish Bank alludes to the nature of its creation in 1966

The Allied in Allied Irish Bank alludes to the nature of its creation in 1966

Wed, Jul 31, 2013, 01:01

There is an old-fashioned night safe outside my local AIB branch, inscribed, rather nicely, with the words “Royal Bank of Ireland”. Almost half a a century ago, three banks were merged into one, which eventually came to be known simply as AIB. The history of at least one of those three banks is full of lessons, if not irony.

The Munster and Leinster Bank started operations in the late 19th century, shortly after the Munster Bank failed, apparently because of mismanagement and a hint of fraud.

The idea that no banks can never be allowed to fail is a thoroughly modern invention, with the patent firmly in the hands of the ECB.

Bank mergers used to be all the rage for many years, on both sides of the Atlantic. It was a simple enough proposition: put two or more banks together, fire half the staff and enjoy the rise in the share price.

Of course, it was never put like that. “Reaping the technology dividend” is the way corporate types like to describe these kinds of deals. Many modern banks are the result of mergers, sometimes a series of mergers occurring over several decades.

Mergers and acquisitions take place for a whole variety of reasons. Sometimes, management just copies what other similar businesses are up to.

The 1966 creation of AIB was preceded, coincidentally or not, a year previously by Bank of Ireland’s acquisition of the bank originally founded by Daniel O’Connell, the National Bank.

Most merger deals end in failure. Countless studies have been published that all point in the same direction. Globally, anything between 50 per cent to 90 per cent of deals are thought to have been unsuccessful.

It seems we have more chance of observing happy marriages than we do of seeing mergers that work.


Measure of success
Of course, it all depends on what we mean by success. Should it be measured in terms of profitability? By what happens to the share price? And how long should we give the deal before we pronounce on its worth?

Actually, the evidence is still pretty compelling: whichever way we slice and dice the data, M&A deals rarely end well.

There are examples of mergers that seem to have worked. Top of many such lists is Disney-Pixar. But league tables of disastrous deals are much easier to find.

AOL-Time Warner seems to occupy the number one slot here, although there are plenty of other contenders.

The mystery is why M&A remains so popular, despite all of the evidence that management should always take a very cold shower before contemplating any kind of deal.

The suspicion is that the people who do deals must have different objectives than the ones subsequently used by analysts in judging the outcome.

Maybe executives just want to have a bit of fun; perhaps they see it as a way of hanging on to their jobs for a little longer.

More charitably, deals may be done to avoid bad things that would otherwise have happened. What would have occurred if the deal had not been done is never, of course, observable.

Vague references to “growth” are always heard. We rarely hear a chief
executive acknowledging
that growth opportunities are next to non-existent in his industry and that he is okay with that.

Growth must always be sought and chased after, a bit like pots of gold at the end of rainbows.


Warning flag
M&A is in the headlines again. Close to home, we have the latest deal involving Elan. With the stated rationale seemingly focused on tax advantages, a warning flag is raised: deals done solely, or even mainly, for reasons of financial engineering are, historically, tricky to execute well.

The success of decades of Irish bank mergers is far easier to judge. All of those deals, all of that history has not, so far at least, ended well. Amidst all of the current carnage it is worth
remembering that an awful lot of history has been
destroyed.

There is little risk of any analyst concluding that Irish M&A activity in the financial sector has created value for shareholders, employees or customers, at least for very long.

Compelling reason

Nevertheless, if history is any guide, some bright bank chief executive is, one day, going to suggest another deal.

It will be confidently asserted that there is a very compelling reason for a domestic or overseas
transaction.

It will be blindingly obvious how the interests of all stakeholders are aligned in favour of the deal. Let’s hope someone remembers.

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